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Saturday October 25, 2014

Washington News

Washington Hotline

U.S. Tax Receipts Up 8.9%

For the 2014 fiscal year that concluded on September 30, U.S. tax revenue grew by 8.9% to $3.02 trillion.

This was $247 billion more in tax revenue than the federal government received in 2013. With spending growth of 1% and an 8.9% increase in tax revenue, the deficit declined to $483 billion.

The 2014 deficit was 2.8% of gross domestic product (GDP). Federal revenue grew from 16.7% of the economy in 2013 to 17.5% by 2014. However, even with a lower deficit the national debt will increase to about $18 trillion by December of 2014.

Treasury Secretary Jacob Lew explained that the reduced deficit was “due to a combination of higher receipts and stable outlays” during 2014. The prime increase in tax revenue came from increasing the top individual tax rate to 39.6%, the top capital gain rate to 23.8% and from growth of corporate tax payments.

The tax receipts for fiscal year 2014 increased in almost all categories.

CategoryRevenue (Billions)
Individual Income Tax $1,395B
Corporate Income Tax 321B
Social Security/Medicare Tax 1,024B
Excise Tax 93B
Estate/Gift Tax 19B
Customs Duties 34B
Miscellaneous Tax 135B
Total $3,021B

Editor’s Note: There will be an adjustment in the 2014 deficit numbers. During the November lame duck session, Congress will consider the 53 tax extenders such as the IRA charitable rollover. These are very likely to be passed and made retroactive to January 1. Part of the $25 billion in cost for the tax extenders will be an adjustment for the 2014 deficit number.

$55 Billion Inversion on Hold

IRS Notice 2014-52, 2014-42 IRB 712, included several technical changes that Treasury Secretary Jacob Lew believed would reduce the number of corporate inversions. Chicago-based company AbbVie Directors had been planning to acquire a company on the English Channel Island of Jersey with the name Shire. The $55 billion acquisition would then be followed by moving the tax headquarters of AbbVie to the island of Jersey. However, on October 15 the Board of Directors of AbbVie issued a notice and withdrew “its recommendation made on July 18, 2014 regarding the proposed Shire transaction.” The AbbVie board recommended that shareholders vote down the proposed inversion.

Illinois Senator Dick Durbin had opposed the inversion. He commented, “AbbVie’s decision is good news for Illinois and good news for America. Like Walgreens before them, AbbVie decided that inversion was not in the best interest of their company. Nor is it in the best interest of our state and country. Congress should follow the Administration’s lead when we return to Washington. Our tax code should reward American companies that want to stay in this country and create good paying jobs – it shouldn’t create incentives to dodge taxes by moving overseas.”

Editor’s Note: While the exact motivation for the decision by the AbbVie directors is uncertain, the combination of political pressure and the IRS Notice had some impact. Under the terms of the proposed merger, AbbVie will pay a $1.6 billion fee for failing to complete the transaction. Senate Finance Committee Chair Ron Wyden (D-OR) commented, “While it looks like the rush of inversions is slowing, we are continuing to examine the issue while focusing on fixing the root problem – our broken tax code.” Wyden stated that he is committed to pursuing corporate tax reform in 2015.

Opportunity in America

In a 2014 study by the Pew Research Center with the title “Global Views on Opportunity,” there were sharp differences between advanced economies, emerging nations and developing countries.

The study reviewed multiple questions with respect to advancement and opportunity for children in the various nations. The first question was, “Will the next generation be better off than the current generation?” The study quotes the “Spring 2014 Global Attitudes Survey.”

GroupChildren Better Off?
Advanced Economies (10 nations) 28%
Emerging Economies (25 nations) 50%
Developing Economies (9 nations)51%

The next question related to the keys or activities that enable children to become successful. These items could form a basis for recommendations that would be helpful for children hoping to advance.

Key ActivityPercentage
Good Education 60%
Diligent Worker 50%
Know The Right People37%
Lucky 33%
Rich Parents 20%

The third question for the advanced nations measured the perceived level of inequality. The median response was that 56% of all of those surveyed believe that the “gap between rich and poor in our nation is a big problem.”

Greece Spain Italy France Israel South Korea United KingdomUnited States Germany Japan
NationInequality a Big Problem

The final section related to the characteristic needed for children to become successful. In the opinion of the surveyed persons this was the “very important to work hard” category. It attempted to measure the belief that through hard work in a society a child can advance.

NationWork Hard and Be a Success
Indonesia 28%
India 38%
Germany 49%
United Kingdom60%
United States 73%

Applicable Federal Rate of 2.2% for November -- Rev. Rul. 2014-28: 2014-45 IRB 1 (17 Oct 2014)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2014. The AFR under Section 7520 for the month of November will be 2.2%. The rates for October of 2.2% or September of 2.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2014, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.

Published October 17, 2014

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